Failed Kansas tax experiment holds lessons for Washington

States, it is often said, are the laboratories of democracy. These days, Kansans are well aware of that as they clear away the rubble from an ill-conceived experiment that went terribly awry.

This month, the state’s Republican-dominated legislature took the once-unthinkable action of raising taxes. More specifically, lawmakers overrode their Republican governor’s veto and rolled back his signature tax cuts, passed in 2012. The move came after draconian spending cuts

Big cuts blew a gaping hole in the state budget

and downgrades of the state’s credit rating.

There are many lessons from this fiasco, none more important than the need to be wary of freelunch promises that sound too good to be true.

Gov. Sam Brownback pitched his tax-cut plan with classic "supply side" economics. Lost revenue from lower rates, he argued, would be made up with surging growth and rising incomes.

That never happened. In 2014, the first year in which the cuts were in effect, revenue from the state’s individual income tax plunged by more than $700 million, a 25% drop. Since then, tax receipts have stagnated at their reduced levels.

The promised revenue from increased business activity and higher wages never materialized. In fact, Kansas’ economy has not responded to this enormous fiscal stimulus in any measurable way. According to the St. Louis Federal Reserve, the state’s annual rate of growth in personal income has been stuck in the low single digits since the tax cuts went into effect.

This lesson should be particularly relevant to lawmakers in Washington, where the Trump administration is pushing what Vice President Pence last week called “the largest tax cut since the days of Ronald Reagan.” The irresponsible plan slashes taxes so much that it would likely hasten the arrival of a debt crisis already on the horizon as the result of surging spending on benefits.

The final lesson from Kansas is that ill-considered legislation almost always benefits some wellorganized constituency or interest groups. In this case, it was the business owners who structured their enterprises not as corporations but as “pass-through” entities. These types of businesses make up the vast majority of all businesses, both in Kansas and nationwide. They get their name because they do not pay taxes themselves, but rather pass their tax liabilities through to their owners or shareholders.

For reasons that can only be called mystifying, the Kansas law set the rate for pass-through income at 0%. That meant wealthy business owners paid no taxes while their employees did. President Trump has taken a similar tack, proposing a top rate of 15% on business owners while taxing their employees at a top rate of 35%.

Gov. Brownback’s tax cuts amounted to a disaster for the residents of Kansas. But for the rest of America, this was a useful experiment.

It empirically disproved the supply-side hypothesis that lower taxes pay for themselves by generating robust revenue.

Congress, take note.